Economics of an Ann Arbor Conference Center III

This is the last in a series of three posts on the economics of an Ann Arbor conference center. Part I questioned whether a need had been demonstrated for additional hotel and conference capacity in the Ann Arbor area. It summarized a number of studies that show a decline in the use of physical conference attendance and discussed the drop in hotel business generally. It also pointed out the number of conference locations already available in the Ann Arbor, including at the University of Michigan. Part II discussed studies on the impact of publicly-funded conference centers on cities. In particular, it quoted Steven Spickard’s excellent summary of the issues involved. It then discussed some of the practical reasons why an Ann Arbor conference center might have difficulty in pulling enough conference business to make the conference center itself economically viable.

The first two posts were modified from a white paper prepared by a subcommittee of Public Land – Public Process, a citizen group concerned with the effect of developing a conference center on the Library Lot. The group’s statement of purpose is on its blog, Public Land – Public Process. The authors of the white paper are Vivienne Armentrout, Nancy Kaplan, Eric Lipson and Leslie Morris. Nearly a year has passed since it was first composed, so this post contains a number of changes and updates.

III. Effects of a new downtown conference center on other businesses and the local economy

One of the reasons given for using City of Ann Arbor property and financial support to establish a conference center and hotel on the Library Lot has been a general claim of its being a boost to “economic development”. The purpose of this post is to examine what that might consist of. Without conducting market studies, much of what can be said about the effect of a conference center is speculative, but some probable effects and claims can be listed and examined.

a. Effect on Area Hotels: An obvious effect would be that new hotel capacity would draw business from existing hotels, both downtown and elsewhere. As noted in Heywood Saunders’ 2007 testimony to Congress, “These cases of public hotel development and ownership present an intriguing case of public projects, making use of the low interest rates available with tax exempt bonds directly competing against privately-owned and operated competitors, often directly across the street.” Since hotel occupancy in the region is already low, new beds would doubtless drive down both occupancy and ADR, possibly causing some hotels to fail. It has been claimed (by Valiant) that a conference center would bring in new business that would spill over into other hotels, but as noted in section 2, that is unlikely.

Recent news that another downtown hotel is being planned at 202 S. Division complicates this picture. The new proposed hotel will be built without public financing of any kind and is likely to proceed quickly, if approved though planning and zoning processes. Clearly this hotel would be a strong competitor for the one at the Library Lot. It would also put considerable price pressure on the Valiant partners’ hotel. (Don’t forget that the hotel is supposed to bear the cost of constructing the conference center.)

b. Increased Downtown Business. Given the nature of conference activities, this is likely to be limited to downtown restaurants. Most conference attendees don’t have time for retail shopping, which is now limited in the downtown in any event. Here is what the Roxbury report (which gives very little space to explaining the claims for economic development) says:

Downtown restaurant and bar owners would generally welcome the additional business a large scale conference center could attract, viewing it as a good way to address the otherwise cyclical nature of their business.

(Note that, other than the Chamber of Commerce, business operators were not interviewed by the Roxbury consultants.) Ted Annis, who published an opinion piece opposing the project in December 2010, puts it colorfully: “A dead zone usually forms around such buildings.” That is, the presence of the hotel and conference center are likely to discourage local customers.

c. What About the Jobs? While there would certainly be employment, it is not clear that most would be “quality jobs”. The hospitality industry is marked by relatively low pay levels. As shown in the attached table, employees other than the top managers would be at incomes below the Ann Arbor area’s median income, and even below the “low income” level. (Note: the spreadsheets within the Valiant proposal that support their claims of payroll tax payments essentially agree with this assessment.) Since these workers would not be able to afford housing in Ann Arbor, they would add to the commuters coming into Ann Arbor, and since their work hours would often not fit into current bus schedules, they might add to parking pressure also.

d. Parking: If the conference center absorbs most of the new parking in the underground structure, downtown business will suffer because of the lack of parking for their employees and customers. This assumes that, as claimed in the justification for building the structure, this new parking was truly a critical need for downtown. As Annis says, it “will drive out regular and occasional downtown visitors because of reduced parking at random intervals. Good luck to light retail.”

e.The High-tech Sector: Clearly a major driving force behind this concept has been the perception that having a shining new facility will be helpful in bringing high-tech small meetings to Ann Arbor. This is presumably where the claim of enhancing “knowledge-based industries” in the Valiant proposal come from. Roxbury consultants interviewed SPARK officials and offered this assessment:

A first-rate hotel conference center in downtown would serve as a meaningful business attraction and retention tool.

Ann Arbor is increasingly seen as an entrepreneurial, innovation-based community. The ability to host business and technology conferences downtown would allow Ann Arbor to showcase its appeal as an attractive headquarters location for such companies.

Of course, there are non-economic benefits that might be realized, including increased availability of meeting space that the AADL could use, and the convenience of having a new facility for use in local business gatherings.

As Spickard says:

“Legitimate public purposes can be served by having civic auditoriums and community meeting halls, and because there is that demand for day-use meetings in every community, even heavily-subsidized civic facilities have the potential to make some revenue by renting space for meetings.”

“The point, however, is to be honest in the community’s objectives. It is a mistake to try to justify development of a civic center for your own residents’ use by claiming it will have great economic impacts. Civic centers are public precisely because they serve social purposes, yet are not sufficiently profitable to be provided by the private sector.”

2 Comments on “Economics of an Ann Arbor Conference Center III”

The Valiant proposal is not financially viable. The projections of operating income in the Valiant proposal estimate real estate taxes for the hotel of about $200,000. If the hotel appraises for $43 million, as Valiant claims, the real estate taxes would be about $1.3 million, or $1.1 million more than the Valiant estimate.

If you subtract $1.1 million from Valiant’s estimate of operating income of about $3.5 million in year 3, you get $2.4 million in operating income which is $100,000 short of paying debt service on the hotel of about $2.5 million. Since the payments to the city for land lease or purchase are subordinated to the hotel debt, it means the city won’t get paid for the air rights and the Valiant proposal fails the test of providing a financial return to the city.

Readers of my long series (What’s in the Box?) know that I agree that the Valiant proposal is not financially viable and will not return money to the City.

I’ve had a hard time parsing their estimates of real estate taxes. I think they got the idea that they might be excused from them because early drafts talk of a “TIF Bond”, which is still in one panel of the summary table. Perhaps the $200,000 was with respect to the condominiums at the top of the hotel.